The BIG Picture

National Home Values

Over this past week I've read two outstanding articles about the depths of housing woes. Two economists arguing fervently, and with impressive supporting evidence, to two completely different ends: On the one hand, we are at the absolute bottom in housing, but prices will not rebound for another 15 years (The Housing Crisis is Over, WSJ.com). And on the other hand, another 10-15% decline in values can be expected to come over the next year and a half, with a recovery to follow (Map of Misery, TheEconomist.com).

That's quite a difference in opinions! I believe I also recall reading something from the National Association of Realtors that said we already hit the bottom in the market. And that was in the spring of 2007, so I don't know what everyone is still whining about.

The problem with telling the future of the real estate cycle is not a failure in interpretting the implications of data, nor a matter of data quality, but a matter of accepting that building theory around such data is subject to your lense: optimistic, pessimistic, or just apathetic. Any economic market has data sets that support those holding half full and half empty glasses to their respective outlooks.

The Map of Misery identifies the data each group is utilizing to support gloomy or rosey outlooks for housing. One method, which utilizes the balance between housing prices and rental prices, purports that the crisis is nearing correction, with rents reaching their trough during the boom, and requiring another 10-15% of home price declines for them to reach equillibrium. This however, assumes that it is home prices that must decline, and that rents will remain stable in what has been a "landlord's market" (read: opposite of a renter's market).

The National Association of Realtors utilizes the most optimistic measure, not surprisingly, which indicates that housing costs (mortgage payments, not home prices) have returned to historic balance with household incomes. These neglect to mention the tightening of lending standards, which are preventing countless buyers from entering the market. Other measures compare home prices to incomes, which have not yet been reigned in (another 10-20% decline needed...).

Taking a look at these two graphs, you can tell the story of the market's coming doom, or its overdue recovery. Perhaps you'll better understand my viewpoint today:

Vehiament cases exist for both arguments, and with legislation being pushed forth by politicians for a fresh new band-aid (thank you P.A.C.'s and polls), all bets are about to be affected greatly as our tax dollars are put to the task. A little bit of helpful Q & A might guide someone who is a layman at the subject, or perhaps just someone as confused as the rest of us.

Do you think the market is due for a recovery this year, next year, or in 2020? Think that Chicago is subject to a different timeline altogether? I'm interested to hear your opinions!

Showing Activity as Leading Indicator for Sales?

Before a home sells, it must be shown. I dare you to try and dispute that fact.

As real estate brokerages arrange appointments for buyers agents to show listed homes to their clients, they create data. ShowingTime.com, known to agents as "ShowingDesk," is the premier online service provider for setting appointments. It is used by my broker, Baird & Warner, along with 40 other brokerages - from the big national brokerages to the independent regional ones. The data recorded for each appointment is logically one of the best indicators of market sales activity, as the more a property is shown, the more likely a buyer will write an offer, and the more likely that agreeable terms can be found, leading to a visit to a closing table.

I track my office's showing activity (above), in addition to online views of each individual property's webpage. In comparing this with a given property's number of showings, I can gauge how well a property is doing, relative to other indicators. ShowingTime.com offers us a snapshot of the nation-wide sales picture, by comparing the percent increase or decrease of showings, and the published record of closed sales. Or, at least, in theory.

If we are to believe the suggestion of ShowingTime.com's graph, then the upsurge of showing activity in March should have yielded a very positive April for home sales. While there was a definite increase (see graphs below), there is another trend represented in ShowingTime's graph: More showings per buyer. This is a definite trend in the marketplace, as buyers take more time to decide the right home for themselves. A buyer can see more houses, and have less worry over their "favorite" getting sold out from under their noses.

The data above, taken from Kane County, IL, includes April's sales number for Under Contract and Closed properties (both detached and attached residential housing). It does reflect an increase in the number of properties sold, but those numbers reflect a decrease as compared with last year's seasonal figures. April 2007 sales in Kane County amounted to 552 Closed properties, while April 2008 yielded 339. The number of properties that have gone under contract in April (606 in '07, 506 in '08), will inevitably revise downwards as transactions under contract fail to result in a closing (due to home inspection, mortgage financing, or other problems encountered).

It seems as though ShowingTime's March report reflects the dispositions of buyers towards a more thorough and deliberative home search, and not a surge indicating housing's recovery by summer time. An uptick, yes, but comparing year-over-year data gives us the whole story. There may not be any dispute to this post's leading statement, but plenty is left to argue for ShowingIndex's direct correlation to sales activity.

Are 1st Floor Master Bedrooms Any HOTTER than the Rest of the Market?

The real estate market has benefitted from the Baby Boomer generation since their births caused the great housing boom after World War Two. As they've grown up and had families, they've been the largest economic catalyst in the modern era, with their luxury home, vacation home, and investment property purchases spurring the most recent boom. Experts have been predicting since well before the boom that the housing market would begin to pick up a trend of ranch homes, and first floor master bedroom homes, townhomes, and condos. With the first "official" baby boomers reaching the "senior" age range (62) this year, the purchase preferences of these buyers is more forward looking than ever. Empty nesters are often looking to move on from their 2 story home to downsize into something that gives them everything they want in terms of upgrades and ammentities, but with more lifestyle flexibility.

Now that the boom of housing has moved to what everyone hopes is the trench of it's decline, let's take a look at what many expect will be the economic engine of real estate's recovery: The 1st Floor Master Bedroom Home and Townhome [FFMH & FFMT]. By comparing the inventory level of these properties, with those of non-1st floor master properties [NFFH & NFFT], we'll be able to see if the trend is emerging, or if the experts' predictions are wrong. For the purpose of this analysis, we'll be examining the Tri-City area: St. Charles, Geneva, and Batavia, Illinois.

Looking at Figure 1, below, inventory levels and sale levels for NFFT's, with FFMT's below them. We can clearly see that at the present moment, the experts' predictions are not yet materialized. Townhomes are seen as more a promising housing sector for baby boomers, with the appeal of reduced maintenance, and lower expense during retirement years. Here, however, the number of homes on the market exceeds the prior six months of sales and contract activity by almost 5 to 1 for 1st Floor Master Bedroom Townhouses. Meanwhile, the general marketplace for townhomes over $300,000 is only a 4 to 1 balance between supply and demand. 1st Floor Master Bedroom Townhomes are presently demanded less than conventional townhomes that have 2 stories, with a master bedroom up at least 1 flight of stairs. We have seen townhomes inventory overall in check, but the over-$300,000 price range is clearly still in a strong buyers market.

Figure 1

On the other side of the coin, in Detached Homes, the entire market has been far from in-check during the market's decline. As seen below, in Figure 2, the FFMH and NFFH markets are at 4 to 1 and 3 to 1 ratios of inventory to demand. With a gross 798 actively for-sale homes of the NFFH variety, and 166 with first floor masters, buyers are in the drivers seat of the entire detached home marketplace.

Figure 2

Why is this the case? Are the experts wrong? I believe it is less to do with the preferences of baby boomers, as it is the effect that the housing market has had on their ability to execute purchases of homes that meet their evolving needs. Given the challenge they face in selling their existing homes, this trend is going to continue to lay in waiting for the boomer buying boom to come.

The West: Are Chicagoland's Far, Far 'Burbs, Far, Far from Bottom?

During 2005 and 2006 I worked with many homebuyers looking for bigger houses to go along with higher market mortgage rates. Despite the weakening of the housing market in the collar counties of Chicago, this left many buyers looking westward. These were especially good times for sellers in DeKalb, Boone, Kendall and McHenry County. After more than 10% of price decline in most of the Western Suburbs, these areas are experiencing a delay of the market correction felt in the collar counties. Accustomed to buyers who were bringing their commute west, they are now finding that buyers are drawing the line at a shorter commute, and are getting the values they want from sellers in Kane or even DuPage Counties.

Sycamore, a growing city in DeKalb County, is a textbook example of this phenomenon. Looking at Sycamore's latest data for days on the market, we see a steady increase since mid-2006. Not dissimilar to many areas, Sycamore is finding itself at the very edge of Chicago's pricing trends, meaning they are downstream of price movements in Cook, DuPage and Kane counties. Days on market is at its highest point - higher than 2007's winter, which points to a long summer, and an even colder winter in 2008. Days on market is only part of the story.

Looking at the "# of Units Sold" data shows exactly how difficult the "thinning" of inventory is going to be for Sycamore. A glut of unsold properties in the North side of town, and competition from neighboring areas like Cortland and DeKalb is proving problematic for Sycamore sellers. Add on to that a newly implemented Buyer's Transfer Stamp (tax) of .5% and you find out why Sycamore's number of units sold have not experienced a spring market pick-me-up (buyers pay $5 for every $1,000 of purchase price, increasing their closing costs). The "# of Units Sold" graphic also includes "Days On the Market" numbers above each month's bar, in blue text.


To the South of Sycamore is its twin city, DeKalb, where Northern Illinois University (NIU)resides. With Chicago's suburban sprawl beginning to have an effect on this "college town," the economic engine of higher education has a complementary force of market growth. DeKalb is also levying increased taxes for its population, reaching in many directions to keep an operating budget intact. These taxes have not been in place to be able to measure their effect, but the timing is as perilous as Sycamore's Transfer Stamp Act. Examining DeKalb's "# of Units Sold"we see that the spring market's uptick in sales has not made a substantive dent at their inventory, as Days on Market continue to grow longer.

The Wild Wild West, it seems, came to the party late. A market recover there may not be as rapid as some closer-suburban areas. Tax policies that penalize homeowners and investors may be contributing factors as we look to the future.

Innovation Amidst Housing Recession - Change Your Mortgage!

Everyone is talking about the housing market downturn, and the impending doom for all of the world's people. Foreclosures will surely swallow us all, regardless of how responsible your own financial picture may be. There is one thing that economists rarely remember to take into account - The resilience and creativity of individuals in the marketplace. Case and point, the present real estate downturn:

Investors -- including big fish like former Countrywide Financial Corp.
President Stanford Kurland as well as smaller fry like Gentry -- are buying
loans on the cheap from lenders who want them off their books. By paying
less than face value for the mortgages, the new holders can modify loan
terms, including shrinking the amount owed, and still make money.

As numerous homeowners struggle to make higher adjusted mortgage payments, or face personal circumstances (divorce, health problems,job loss) that prevent them from keeping up with their obligations, there seemed to be no other way out. Many cannot get out of their loans by selling their homes, since they purchased properties utilizing 100% mortages, or refinanced at a similar loan-to-value ratio. Further, banks across the nation have been facing a struggle of defaulting subprime mortgage portfolios - bets that made sense two and three years ago. With everything stacked against these parties, and the fallout of their misfortunes seeming quite vast, the prospect of savvy investors saving the day sounds like an enormous blessing - and a profitable one for them. Read on:

With some economists projecting 2 million foreclosures this year, legislators
and regulators are hoping to encourage wide use of this model. They want lenders
and investors in mortgage bonds to mark down what borrowers owe and then provide
them with lower-cost loans. It's a tricky business: No one wants to be seen as
bailing out speculative buyers or imprudent lenders, but they also don't want
mass foreclosures to devastate neighborhoods and the economy.

The greatest enemy of this program, however, appears to be the victims, themselves. Fewer than 50% of homeowners who are delinquent on their subprime mortgages are willing to return phone calls regarding lender work-out plans (mortgage lenders attempting to renogotiate loan terms in order to keep a homeowner in their home, and paying agreeable loan terms). Many homeowners worry that lies told regarding stated income, or other fraudulent information given to lenders, will come back to haunt them. Given the widespread existance of such fraud, on behalf of homeowners and lenders, investors buying subprime mortgage notes are not making fact-verification of old mortgage applications a matter of importance.

The headline here reads of an innovation that may save the real estate market, and the broader economy. It may as well read:

Homeowners Facing Foreclosure: Call Back Your Lender!

Source:
Investors move in to save broken mortgages
Los Angeles Times, E. Scott Reckard
http://www.latimes.com/business/la-fi-loanbuyer-2008may01,0,3521729.story

Condo's/Townhomes Vs. Detached Homes

As some readers may have noted, a trend has been playing out through this real estate cycle that deserves mention: Townhouses & condominiums are not in the same trough of this cycle as detached single family homes are.

St. Charles Detached Homes

St. Charles Attached Homes

In fact, attached houses are actually in territory that indicates they are neutral as to being a buyers/sellers market. This sample was taken of strictly St. Charles, Illinois, but I am seeing this play out through much of the suburban area. Looking at the market time statistics, below, one can see that attached properties are selling in less than 180 days, on average.

St. Charles Attached Market Times

Why is this happening? Three factors are at play- lower prices for attached properties put them within the reach of cautious first time homebuyers; todays buyer is looking for a more "move-in ready" home - less tolerance for major renovations that often come with older single family detached homes; and buyers often do not have time to do the yardwork and maintenance that goes along with a detached home. Today's buyer is changing, which has affected families and individuals selling their homes. With the challenges of being a "move-up" buyer in this market, first time buyers are a major driving force, despite the drastic reduction in their ranks due to the extinction of many high risk loan instruments that brought more first timers into the buying process than ever before.

[note: Market time statistics are problematic because of real estate agents cancelling or expiring property listings, and then re-listing them the same day. This is done in order to reintroduce a property to the "hotsheet." This is part of the reason that I utilize absorption statistics to indicate realistic expected market times.]

In Defense of: The Home Ownership Ideology

Dean Baker, author of "The Conservative Nanny States," has written an article featured on RealClearMarkets.com entitled "The Homeownership Ideology." Baker's article, after blowing past the alleged causes of the housing bubble and subsequent deflation, proceeds to level blame against the belief in home ownership as a "virtue" - in and of itself. He points out that during the height of the market's fervor, it was not good policy by economic and political talking heads to promote buying a home. Especially, Dean articulates, when it comes to lower income households. These families and individuals opted, quite tragically, to buy properties at prices 20 to 30 times the annual rental cost in their given communities.


I agree with Dean's premise - pitching homeownership to the poor and those who cannot afford it doesn't make sense. In fact, I think the whole reason mortgage products like Option-ARMs, 100% Interest Only's, or 40-Year-ARM's ever saw widespread use was because individuals that did not have the discipline or wherewithal to purchase a home had been convinced they needed a home - and at any cost. Those people are now realizing the cost, as are the businesses that swarmed around them for their one-time business. Now we all feel the repercussions of those actions.

I do have some mixed feelings about a website sponsored by Illinois Governor Rod Blagojevich and The Illinois Housing Development Authority (ihda.org). While some of the money offered drastically improves one's ability to purchase a home, some of the conditions make it painfully clear that those best qualified are those with the least qualifications. Certainly we should not be encouraging EVERYONE to become a homeowner. This is somewhat akin to suggesting an alcoholic try to keep a houseplant alive before trying to date, or own a pet. Perhaps individuals should be coached along the line of financial discipline, and income stability, prior to purchasing homes on 30 year mortgages. I am sure Blago is not troubled by the website- I believe he has enough other things worrying him.


What I differ with Mr. Baker on is primarily a matter of timing. While I believe that baiting poor or lower-middle-income Americans into buying homes is not a positive thing for Americans, I do not think that de-legislating the allure of owning your home is an idea that should be batted around in our halls of government. But especially NOT NOW.


If there has ever been a time when individuals should be encouraged, or browbeaten, as to the virtues of homeownership, it is now. When rent prices are trying to skip right alongside with inflation, buying a home at a still-historically-low interest rate seems to be a sound plan. The market also provides them the time to educate themselves, and exercise patience - finding the correct property, at a price that truly suites their budget.

Imagine, however, if congressmen and women began discussing reversal of the tax deductibility of mortgage interest payments. The legislative carrots that guide individuals into homeownership ought not be scrapped just because markets are subjected to a business cycle that can be destructive at times. The ideology of homeownership's virtues should not be traded in just because of the financial downturn of the moment - perspective is needed to look into the face of the next boom, and sort out what can be done differently to ensure fewer are preyed upon, and fewer succeed in defrauding the system. Instead of railing against homeownership, articulating the true benefits of home ownership might be a more productive endeavor.

Being a Landlord isn't for Everyone . . .

You have to read this article from the San Fransisco Chronicle to believe it. I was speechless.

S.F. Landlords charged with tenant terror

A couple from Nevada (the wife, a real estate agent) have literally lost their minds in managing a 3 story building in San Fransisco, and frightening hilarity ensues. Read on...

The Bubble Blame Game

I stumbled across a fascinating article this week, in which a British writer evokes the virtues of falling housing values. On the other side of the pond, however, our attitude is not so chipper, despite what Wauchovia is indicating as a drastic improvement on the housing affordability curve. I would have to admit that it is certainly one way we could avoiding blaming anyone for the present real estate funk. In fact, I might be willing to step forward to claim that it was us Realtors who were responsible for such unheralded affordability!

Allow me to take one step backwards, for the time being. Since there isn't exactly a Franz Ferdinand "moment" for the real estate boom, there is, instead, plentiful blame to spread around. It took place over period of at least 3 years, which is the time frame of appreciation gains that we are presently undoing. It's not a matter of who is at fault, but more so, what could participants have done differently: what would have made a difference?

The basic blame alleged against each profession seems to run along the lines of the following:

Realtors - Bought into the notion of invincibly appreciating home values; encouraged home buyers who were trying to buy beyond their apparent means; some acted as the "glue" in transactions that truly should not have happened.

Mortgage Brokers (the salesperson who brokers an individual loan to a home purchaser)- Many advocated for adjustable, reverse amortizing, interest only, 100%, and other higher risk mortgage products; often "filled in the blank" for Stated amounts [income, asset, job, you name it...] for subprime and Alt-A loan products; coached appraisers as to values; coached clients, and all involved parties, as to what they needed to say, or do, in order to get a deal done.

Appraisers - Valuing properties at contract prices, often well above list prices, and in spite of obvious comparables.

Mortgage Lenders (the institutions originating the mortgages sold to investors)- Often knew full well what mortgage brokers were doing to put together deals; uninterested in rehiring any appraiser who had under-appraised a property; collateralizing made sense, at the time.

The list goes on, surely, but this is only the ones responsible on the professional side of the coin. The consumers, be they real estate investors (i.e. - flippers, developers, speculators), first time buyers, million dollar buyers or even corporate relocation companies, have guilt on their hands as well. And builders is a whole other chapter...

My favorite scapegoat of all, however, is THE GOVERNMENT. Municipalities, in particular, are a fabulous party for ridicule. Did your city or county do anything particularly profitable during the boom? Perhaps something that might have backfired into the drastic drop in revenue at the local level? Or maybe we should thank everyone for such terribly affordable homes.

Syllogisms in Real Estate

As someone with a philosophy education background it was nice to see another Real Estate pro struck with a strain of the very same affliction. The following syllogism was offered up by Dan Green, the "Aristotle" of mortgage lending (whether that's a good thing or a bad thing, sorry Dan!), in his blog "The Mortgage Reports":

1. Mortgage bond markets are unpredictable.
2. Mortgage bond markets dictate mortgage interest rates.
3. Therefore, mortgage interest rates are unpredictable.

As many know through inductive reasoning, or life experience, "waiting to lock" is akin to "going to the boat" to lower your mortgage rate. Dan's syllogism helps those "greener" individuals who do not yet have first-hand experience as to the virtues of locking, by offering a deductive form of reasoning. Well done.

I can attest, from personal experience, that not locking makes home buyers into day traders during the "under contract" phase of their home buying experience. With zero experience, and a very rudamentary understanding of exactly how the mortgage bond market functions, they expect to outsmart mutual & pension fund managers, professional traders, and computer trading programs. With all of the other stresses introduced by purchasing a home, this seems like a lofty endeavor!

Source
The Mortgage Reports
http://www.themortgagereports.com/2008/04/what-aristotle.html